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Should Emaar and Nakheel work together?

The long-stalled Dubai Waterfront could be a win/win situation for both Dubai developers

By Anil Bhoyrul

Sun 03 Feb 2013 09:01 AM

On 24 November 2008, just two months after the Lehman Brothers crash, Emaar chairman Mohamed Alabbar was appearing on stage at a conference in Dubai, when someone dared to ask the question we had all been thinking: would Emaar and Nakheel consider merging?

Alabbar surprised everyone with his response, saying: “Nakheel and Emaar are two separate entities, but we welcome collaboration. If there is a chance, I will welcome it.”

Of course, the two companies never merged or even collaborated, and their fortunes over the five and a half years couldn’t have turned out more differently. Emaar went on to complete the iconic Burj Dubai, it successfully divested into retailing (the Dubai Mall being nothing short of spectacular), and even its long-battered share price is showing a 76 percent gain over the last twelve months.

Nakheel, meanwhile, had to write down the value of its real estate assets by $21.4bn since 2008 and has been forced into a $16bn debt-restructuring plan. Even though it recorded an impressive 57 percent rise in profits last year to AED2bn, the company has long been hampered by its debt troubles. Last year it made interest and profit payments of around AED800m to all lenders in 2012, and has made cash payments of around AED10bn to various trade creditors and contractors since the start of its restructure. The reputational damage has been even bigger.

What all this means, as chairman Ali Rashid Lootah rightly said last year, is that Nakheel can no longer build megaprojects. “We have to be realistic about these projects now… There is no market demand for them. We will be selective," he said (in reference to the canned Trump Tower).

But what of Emaar and Nakheel “collaborating”? A merger or takeover would suit neither, and Emaar shareholders would never stomach taking on the liabilities (nor would it make sense). But there is one project that could result in a win/win situation, the long-stalled Dubai Waterfront project.

This was planned to be one of the world’s most incredible projects, adding more than 70km to Dubai’s coastline and encompassing an area of 1.4 billion square feet of water and land developments.

It was expected to house an estimated population of 1.5 million people, and being located close to the new Al Maktoum International Airport, the project had a lot going for it. The conglomeration of canals and an artificial archipelago would have created the largest waterfront and largest man-made development in the world.

None of that ever happened after the project stalled in 2009. Given that Nakheel doesn’t have the financial muscle to restart this development, why not hand Emaar a Developer Management Agreement (DMA) to take over the project? Emaar has shown with its developments that is has the right management and leadership to do the impossible — but the problem the company faces is that it is running out of land. In fact, Emaar has no beachfront land whatsoever. Given what a success it has made of Downtown Dubai, the possibilities for a coastal development are endless.

The beauty of such a deal is that Emaar wouldn’t be taking on any of Nakheel’s liabilities. Assuming it agreed a deal whereby it was paid a fee for the DMA, and a percentage of future revenues, this can only be welcomed by shareholders.

One of the Waterfront’s key concepts was that extending from the coastline into the Arabian Gulf would be a series of connected islands featuring villas and high-end accommodation.

I can see this all being music to the ears of Emaar’s shareholders: great as the company has been at delivering its units, it is running out of units to deliver. Emaar has done well to shift the focus away from property into the hospitality and leisure sectors, but let’s be honest here: this is fundamentally a brilliant property developer, and now is the time to be back in property.

That’s why all 542 units released for sale off-plan at the The Address The BVLD serviced residences were sold out on the first day of the launch last year, with customers queuing up to two days in advance to place an order at the Emaar Sales Centre in Downtown Dubai. The same happened this week when Emaar launched The Address Residence Fountain Views.

The current share price of over AED4 is a sharp increase in only the last four weeks, but long term, the company’s market value will in my view really surge with another megaproject on the books. Adding the Waterfront to the Mohammed Bin Rashid City won’t get Emaar back over to AED20 a share, but AED10 a share is not unrealistic in the long term.

As for Nakheel, a DMA-style deal also makes sense. It means the fabulous land bank the company has can start to be realised, not only ultimately bringing in revenues, but for now, giving an all-important signal to creditors that it is serious about making a comeback.

The downturn has long put paid to a merger, but now could be the time to collaborate.